Ambiguous contract clauses

On behalf of Warren Gammill & Associates posted in Contract Disputes on Thursday, March 8, 2018.

If a contract clause can reasonably be interpreted in more than one way, that's an ambiguous clause -- and a potential problem for your business.

For example, what happens if a contract reads "Employees will be reimbursed for their out-of-pocket expenses during their training period, including hotel costs and per diem." Does that mean employees will be reimbursed for all their out-of-pocket expenses, including the cost of evening entertainment or is reimbursement limited just to hotel costs and per diem? The potential for confusion is there -- no matter what was meant by the contract originally.

Other terms that end up becoming litigious are phrases like "reasonable" or "best effort" when tied to production times. While designed to be helpful, they have the potential to backfire. What you feel is reasonable may be far different than what a supplier feels is reasonable when it comes to keeping your business on schedule. A significant gap in understanding can actually become a financial disaster.

Courts often look beyond a contract's "four corners," or plain language, to ascertain the intent behind ambiguous clauses. Courts will often look at the comparative sophistication of each party involved in the contract, whether counsel was involved or not and what terms might have unique meaning under specific industry standards.

The negotiations leading up to the contract are also important -- as is the way that parties have performed in the past. That gives the other party a reason to expect a continuation of the same. You can also generally expect the courts to enforce an interpretation of a clause that's based on a party's previous performances -- rather than its plain meaning.

Naturally, you want to avoid contract disputes over ambiguous clauses whenever necessary -- but they can be hard to spot when you think the meaning is obvious. That's often why it's wise to engage someone to review a contract's terms very carefully before making a deal.